7 Legal Business Structures You Should Know
If you are planning to start a business, one of the most important decisions you have to make is choosing a legal business structure. The legal business structure of your business affects how you pay taxes, how you raise funds, how you manage risks, and how you share profits and losses. In this article, we will explain what a legal business structure is and what are the main types of legal business structures you can choose from.
What is a legal business structure?
A legal business structure is a way of organizing your business in terms of ownership, liability, taxation, and management. It determines how your business is registered with the government, how it operates, and how it interacts with other entities such as customers, suppliers, investors, and creditors.
There are different types of legal business structures that suit different kinds of businesses. Each type has its own advantages and disadvantages, so you should carefully consider your goals, needs, and preferences before choosing one. Here are some of the factors you should think about when choosing a legal business structure:
– The size and nature of your business
– The number and type of owners or partners
– The level of control and decision-making authority you want to have
– The amount of risk and liability you are willing to take on
– The tax implications and benefits for your business and yourself
– The cost and complexity of setting up and maintaining your business
What are the main types of legal business structures?
There are many types of legal business structures, but here are some of the most common ones:
1. Sole proprietorship: This is the simplest and most common type of legal business structure. It is when you own and run your business by yourself, without any partners or shareholders. You have full control over your business decisions and operations, but you also have full responsibility for all the debts, obligations, and liabilities of your business. You report your business income and expenses on your personal tax return, and you pay taxes at your individual tax rate.
2. Partnership: This is when two or more people agree to share the ownership, profits, and losses of a business. There are different types of partnerships, such as general partnerships, limited partnerships, and limited liability partnerships. In general, partners have joint authority and responsibility for the management and operation of the business, but they also have joint liability for the debts and obligations of the business. Partners report their share of the business income and expenses on their personal tax returns, and they pay taxes at their individual tax rates.
3. Corporation: This is when a business is registered as a separate legal entity from its owners or shareholders. A corporation has its own rights and obligations, such as entering into contracts, suing or being sued, owning property, and paying taxes. A corporation can raise funds by issuing shares or bonds to investors, who become the owners or shareholders of the corporation. The shareholders elect a board of directors, who appoint managers to run the day-to-day operations of the corporation. The shareholders have limited liability for the debts and obligations of the corporation, but they also have limited control over the corporation’s decisions and operations. The corporation pays taxes on its profits at the corporate tax rate, and the shareholders pay taxes on their dividends at their individual tax rates.
4. S corporation: This is a special type of corporation that elects to be taxed as a pass-through entity. This means that the corporation does not pay taxes on its profits at the corporate level, but instead passes them through to its shareholders, who report them on their personal tax returns and pay taxes at their individual tax rates. To qualify as an S corporation, a corporation must meet certain criteria, such as having no more than 100 shareholders, having only one class of stock, and having only U.S. citizens or residents as shareholders.
5. Limited liability company (LLC): This is a hybrid type of legal business structure that combines some features of a corporation and some features of a partnership. An LLC is registered as a separate legal entity from its owners or members, who can be individuals or other entities. An LLC can have one or more members, who can manage the LLC themselves or appoint managers to do so. The members have limited liability for the debts and obligations of the LLC, but they also have flexibility in how they distribute profits and losses among themselves. An LLC can choose to be taxed as a pass-through entity like a partnership or an S corporation, or as a separate entity like a corporation.
6. Cooperative: This is when a group of people or entities join together to operate a business for their mutual benefit. A cooperative is owned and controlled by its members, who share in the profits and losses of the business according to their contribution or participation. A cooperative can be organized for various purposes, such as providing goods or services to its members or customers,
or promoting social or environmental causes. A cooperative can be taxed as a pass-through entity like a partnership or an S corporation, or as a separate entity like a corporation.
7. Nonprofit organization: This is when a business is formed for a charitable, educational, religious, scientific, or other public benefit purpose. A nonprofit organization is not owned by anyone, but is governed by a board of directors or trustees, who oversee its mission and activities. A nonprofit organization does not distribute profits to its members or shareholders, but reinvests them in its programs and services. A nonprofit organization can be exempt from paying federal and state income taxes, but it must comply with certain rules and regulations to maintain its tax-exempt status.
These are some of the main types of legal business structures you should know. Choosing a legal business structure is a crucial step in starting and running a successful business, so you should consult with a lawyer, an accountant, or a business advisor before making your decision.
What is a Legal Business Structure?
A legal business structure, also known as a business entity, is a government classification that regulates certain aspects of your business. It determines how a business owner runs their business, how they pay taxes, how they file paperwork, how they raise money, and how they protect their personal assets from liability. There are different types of legal structures, such as sole proprietorship, partnership, LLC, corporation, and s corporation, that have different advantages and disadvantages. Most businesses should choose a legal structure and register with their state .
Global Demand for Legal Business Structures
The global demand for legal business structures is increasing as more entrepreneurs start new businesses or expand their existing ones across borders. According to a report by Grand View Research, the global legal services market size was valued at USD 849.5 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 4.1% from 2020 to 2027 . The report attributes the growth to factors such as increasing globalization, rising complexity of legal regulations, growing need for litigation support, and rising demand for alternative legal service providers. The report also identifies the key segments of the market based on service type, firm size, provider type, and region.
References:
https://www.sbif.cl/sbifweb/internet/archivos/DISCURSOS_5983.pdf
https://business.gov.nl/starting-your-business/choosing-a-business-structure/public-limited-company/
https://ondernemersplein.kvk.nl/overzicht-rechtsvormen/
https://www.businessnewsdaily.com/8163-choose-legal-business-structure.html
https://www.grandviewresearch.com/industry-analysis/legal-services-market
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
https://www.irs.gov/businesses/small-businesses-self-employed/business-structures
https://www.nolo.com/legal-encyclopedia/business-structures
https://www.investopedia.com/terms/b/business-structure.asp
